Avenue Supermart: a compounding machine?


(Shailesh) #1016

To give low price you need to have low cost .

In Retail one of biggest cost is real estate - In physical retail to get consistently great real estate location and sustain the cost of location say 5/10 years down line when lease come for renewal is tough . That is what killed many retailers in 2007 … who expanded fast through WC funding by their suppliers .

Technology is location agnostic hence makes scaling is much easier … So to be low cost tomorrow you need to invest in technologies .

Lets understand from history . Why Walmart was able to beat Sears … It is because of huge investment in Supply chain technologies that helped it to be more fresher , relevant for customers besides low cost .

In case of DMart they are not trying to study / work on basic queuing theory or waiting line problem . That is highly inconvenient for customers plus increases service time blocks space as customers are just hanging around till they have been billed . These all add to cost in long term

Now how a traditional retailer offers low price In India across trades …

  1. Real estate owned by Retailers - then he works on marginal cost based pricing - but Scaling beyond few location is difficult

  2. Smart WC funding ( credit terms and annual discounts ) by supplier - This is great strategy that works on same principle as NBFC - But key is you need to grow by > 20% + to ensure that chain does not break . Also in mean time you hope some suppliers will be bankrupted and you don’t have to pay them the principal amount.

  3. Mix of spurious goods with brand goods :

  4. Conduit to convert black money to white :

We need to understand DMART as “ethical” company can use only strategy no 2 to offer low price . That is what Future , Subiksha etc did in 2003- 2007 era … but when growth slowed down in post 2008 , these retailers had tough time … I would like to see DMART survive one such downturn to understand their real strategy of offering low price … without technological edge …


(MD Razi G Haider) #1018

Hi @Gurmeet , Please don’t clutter the thread by posting unnecessary external link.You can add your own view ,any negatives (if any) like @kb_snn did. It will enrich the quality of Dmart thread and thought process of other participants.

@adminph2 , @manish962 is the best person to take decision about this. Thanks to admin for bring back the quality of the thread and deleteting the unnecessary posts. Hope this continue in future also which will bring back many old valuepickrs to post their valuable thoughts in the thread …


(Investor_No_1) #1020

With my limited knowledge on Dmart, as I am not actively tracking it, is that it opened its first store in Powai in May 2002. So it has already seen few downturns including the global recession. I think low cost is not the only strategy. Low cost is the outcome. How you achieve that low cost is what differentiates the come and go companies and century leaders. I remember reading on Mr Damani that how he used to visit the traders in disguise (parking his car far away and dressed like a common man like he usually always is) and tried to understand the pains of traders first. How he befriended them, made them feel like partners and ensured the best QUALITY first. How he studied on what items to buy and how much to buy etc. etc. These small things go a long way and I am sure Mr Damani is here for a real long run of profitable growth and comparing Dmart to other retailers that collapsed in 2009 downturn may not be right (just my thought).
So, business model is right to me as the way of achieving that model, which really matters to me, is right. Valuation is something I am not sure, retail policy of country, e-commerce threat or boon, mix of offline online, technological disruptions…these are factors I am not sure. Good for Mr Damani that so far his methodology has been spot on and I trust him much more than myself :slight_smile: I wish I buy Dmart share someday and it flourishes in this disruptive world!
Disc: Had applied for few lots in IPO, did not get a single share. Market did not give opportunity to buy later so far. Have other ideas suiting my investing style at the moment hence not invested still, but huge confidence and respect for Mr Damani is what prevents me from quitting on it.


(MD Razi G Haider) #1021

My 2 cents…

1.Unlike Future etc in pre 2007-08 , dmart does not grow by taking huge debts (which was the actual reason of fall of those retailers in 2008) ,its OCF is much stronger to keep the store expansion and will help the day to day operation intact. They were no where to close of ROIC(incremental) of DMART which is 40% .
2.For WC funding, the short term debts which DMART require for operation is minimal , Interest coverage ratio at least tells that .
3.DMART will not allow to default any suppliers . Payable numbers indicates that. Wlamart squeezed suppliers ,Dmart is just opposite.

Also below link helps to understand why low cost producer thrives during recession.


(Shailesh) #1022

Right points for discussion …

Future group and subhiksha started in 1990s … The scale was small and both came with lot of ground common sense and to great extent they had very innovative ideas . No one in stock market knew about them in first downturn ie 2001 - 2003 , expect their customers .

Then suddenly financial market discovered them in 2003 - 2007 boom . Lot of books and articles were written on them and their ground up … People started copying them and slowly differentiation reduced .
++ These retailers expanded fast and they had rely on employees for implementing their ideas . Things started going wrong but still it was hidden because suppliers were ready to finance their growth .

Then suddenly 2008 happened - Growth slowed and many suppliers wanted money back , credit terms . To add to their woes - rentals increased , their expensive hiring started hurting them .

Retailing is very tough business - ideas are easy to copy - and customers are loyal only to price …

Why has DMART profit reduced in this quarter … has NBFC -MSME crisis any connect with it … I don’t know but when COC increases - Retailers need to work more harder to maintain profitability


#1023

Sir, Dmart profit reduced to reduction in Gross Margin (effect of price cut)and pre loading of expenses. If its growth really linked to NBFC crisis then how revenue grew at @33%?


#1025

Hi @bheeshma ,
I want to calculate the reinvestment rate percentage of Dmart’s , How to know that from above caluclation ? I cant 'take simple Incremental capital/PAT as DMART used IPO money / Debt for employing capital.


(Bheeshma Sanghani, PhD) #1027

(Prior period PAT - Current PAT)/(Prior period Working capital + Fixed assets) - (current WC + FA)


#1028

Hi @bheeshma

Above formula is giving negative figure, Instead if I use (portion of NOPLAT invested back into business)

invested capital(t+1) - invested capital capital(t) /NOPLAT(t+1)

For Fy2018 , it is

=(4098-3202)/926
=97%

Edit : Corrected Formula


(Amit Jain) #1029

There are many threats to a high PE stock. Unless the company has a unique product which no other company can compete with, kind of monopolistic or duopolistic environment, high PE story is not likely to be a long one.

JIO killed the entire Telecom market… Now let’s see what happens in retail.


(Gurmeet) #1030

I totally agree with you, High PE stocks are too risky an investment because as the intensity of competition increases it becomes difficult to maintain high rate of profit growth.


(sincyvarghese) #1032

Reliance Retail - Quarterly Revenues ~ 36,000 crores. Number of stores 9907. Average Revenue per store = Rs 3.6 crore per quarter. Reliance Group Net Profit. Total EBITDA = Rs 22,000 crores. Total Debt = 320,000 crores. Total Debt/Yearly EBITDA = 320,000/80000 (extrapolated from one quarter) = 4.

DMart - Quarterly Revenues ~ 5,450 crores. Number of stores 164. Average Revenue per store = Rs 33.2 crore per quarter. Total EBITDA ~ Rs 470 crores. Total Debt ~ 500crores. Total Debt/Yearly EBITDA = 500/1900 (extrapolated from one quarter) = 0.26.

From the number we see that financially DMart is performing much better than the retail arm of Reliance. Reliance has a much greater leverage in terms of scale. Its total EBITDA is about 40 times that of DMart and will remain thus for some time. Its debt is also 500+ times more but they are quite capable of servicing it.

I do not know if Reliance Retail gives a break-up of the store types. From lat years annual report I could see that there are about 523 Reliance Fresh stores which may have gone up to 700 now. Then there is something called Reliance Smart whose numbers I do not know. Their last years annual report says Reliance Digital has 7000 stores. I think this includes both the electronics store and the Jio stores.

Reliance is the largest retailer and DMart is the most successful in India. If we look globally the DMart model has come up more successful but it does not guarantee anything in India. I think there is going to be two way customer poaching. For Reliance the 164 locations of DMart are good poaching grounds for customers. Similarly the 1000 Reliance Fresh and Smart stores are good poaching grounds for DMart. My observation is that wherever DMart goes, smaller(or other) retailers like More, BigBazaar, etc close shop. I have not yet seen the reverse happening. Now this is purely anecdotal and there is no empirical data to support this.

The strength of Reliance Retail are the following -

The parent company throws out 80,000 crores of EBIT every year. Hence Reliance is much more aggressive in opening new stores in newer locations.


2. ```
As the scale of operations increase their leverage with suppliers increase. Probably lower cost and longer supplier payment cycle.

Reliance Jio gives them an advantage in terms of technology. Probably tech savvy customers will move to the more advanced Jio platform for their shopping. But from experience I have observed that PoS is much more easy at DMart. Even with their primitive PoS systems I never experienced a single mistake in their check out process. Reliance with all technology is way behind.


4. ```
Ego of promoters. To become number 1 Reliance can throw cash at the problem at a scale DMart wll not even be able to dream of. Reliance can throw profitability to the winds and the shareholders will not bat an eyelid.

The weaknesses of Reliance of which some are strengths of DMart.

  1. Per store revenue is much less compared to DMart.
  2. Many stores are smaller and hence does not cater to the monthly grocery needs of many families. I faced this issue and stopped going there since the new store at Kharghar is too limited for my monthly grocery shopping. Other locations may be better.
  3. Fruits and vegetables - I may be wrong here but the amount of wastage could impact profitability in a business where the net margins are 5-8%.
  4. They open in newer locations which opens up the market. DMart can later come and set up a store and poach their customers. This happened for More and Biz Bazaar in Kharghar. Reliance can also do the same but then the poaching ground is smaller.
  5. Reliance Retail is into many luxury brands. Most of the luxury brands will not perform so well in India for some time into the future. Even Hamleys are deserted these days.

I do not know who will survive to write the story of Indian retail. Kishore Biyani wrote his story a little too prematurely. Let us watch Dmart and Reliance closely.

I feel if done well a diverse nation like India will have space for more than a few retail giants.


(ravish) #1033

I was a regular at Dmart as it is only 500 mtr from my home. I have been using it since 2007. I have seen it emerging, changing, upgrading and doing extremely well over the years. I also did some product supply to it so you can say i know a little bit how they are at procurement also. As we all know Dmart’s power is in its FCF generation, Asset turnover ratio, inventory management and satisfying customer and suppliers simultaneously. I have been to Big Bazaar , More, Reliance fresh and now shops Online because of the rush i face even on weekdays or any day any time at Dmart. Some problems i have faced as a consumer and corrective measures Dmart has taken to solve my issues are commendable from a customer points of view. I am elaborating my facts in pointer please bear with if there is some flaw in my observations:

  1. Rush at Store is increasing Day by day. Earlier people use to shop at starting of month but now when many of us have credit card we dont want to wait for salary or we can shop now any day in a month. Solution: Dmart has extended store timings to 8 am to 11 pm i.e increase of 3 hours.
  2. In only last 3-4 years i have noticed the store manager at the store floor earlier it was not the case so manpower cost is increasing for it. Increase in store opening time has also increased the manpower cost as you would need more people at same store in shifts.
  3. It has increased discount from 6% minimum to 7% minimum and also started to ran promotional offer for credit card holder or can say for specific customers. It wasn’t the case earlier i have never seen any credit card or debit card offer clubbed with Dmart. This must have increased some expenses.
  4. No space to freely move or shop and worst was to stand in 10 mtr long que at peak hours but now they have doubled the billing counter where i shop. They have also made the billing very quick, their slogan is no more than 4 persons at billing counter if it is so then click photo and send to them. That is impressive look how they are solving the problem.
  5. Earlier there was a vegetable counter which was not profitable and very difficult to run it needs a lot of quality check and a lot of manpower is involved in this. Now they have shut it down space is given to more FMCG products. Again good step to improve.
  6. I have read and seen many a retailer doesnt find it viable to operate once the real estate price shoot up. But Dmart owns it land which is acquired way before the development. This is also a good step for any retailer to follow.
  7. I am worried about their parking management at its store after a particular point no more people would like to park their vehicle 1 km away from store and shop. It will be very difficult to generate more sales if parking is going to restrict the entry for its customer. I thing this can be a bottleneck for its growth at these stores if it is not addressed well. To some extent fast billing can improve it but not much. So concern of their same store growth rate will be a thing to look out for.
  8. A lot of or i were to say maximum of the non-FMCG items are imported from china so how it is going to effect its profitability growth is also a point.
  9. I have no doubt about the managerial prowess of its promoter and top management level but the real growth will come from new store opening and if they slows it down due to any issue then there is problem to be worried about.
  10. They have moved to online platform very intelligently and move is also gaining traction but will it be successful or can drive sales in other non metro cities?

Please comments on my above post. I am here to learn.
Discl: No holding.


(Gurmeet) #1034

It is very difficult to continuously grow the same store sales at initial rate after 8 to 10 years.
You are absolutely right that growth would come from new stores.
As Dmart is very careful about location, land price, D/E ratio etc. new store opening growth rate would come down drastically going forward hence growth in sales & profits. I believe growth rates for next 10 years would not be comparable with last 10.


(Amit Jain) #1035

Hi Ravish,

The minority shareholders are convinced that Dmart is a good business. One of the best around. But, all that is already factored into the price.

Now the real question is will there be a 30% growth going forward? Because at PE 98, that is what you are paying for!

It has 164 stores, will the management be able to add stores and increase efficiencies of the existing ones, to exhibit a 30% growth in EPS YoY… each year, is a big question !


(Divyanshu Bagga) #1036

IMO, high PE is also because of high visibility of future earnings (protected by “low cost” moat)


(Shiv Kumar) #1037

The DMart store near my house - Dahisar in Mumbai - is always crowded. Shopping is a little more convenient from 8 to 9 or after 9.30 pm. The store which is six-seven years old appears run down with merchandise stacked above the shelves to allow more room for shoppers. They have increased discounts and were also accepting PayTM till December-end. But they have discontinued this now.

Despite Reliance Retail giving more discounts, I find DMart cheaper in many categories. But Reliance Retail is expanding majorly into house brands which are far cheaper, example - pasta. DMart has its house brands in cooking oil and some products which are also very competitive.

I notice that DMart ready has opened five to seven kms from the mother store in Dahisar where people can pick up stuff ordered online. However I hardly see crowds at these outlets.

disclosure: no holding


(Devang) #1038

No doubt about the rush there in Dmart, I am only worried about the margin decline from 10 to 8%. The management says that they are not going aggressively then why they need to lower their prices even more to derive up sales if they are already the best. As an investor I need profit growth to survive at these valuations what in my opinion is that it is difficult to again be on back at 10%.

Technically the gap down of 9% recently on a good volumes speaks the same. It might just be a start of valuation correction


(Pankaj J) #1039

Perfectly captures the observations. Same things are observed in the Dmart store near me in Pune. There is rush in the store but billing counters are quick and no more than 4 people at counter. Reliance fresh has same issue of long queue at the billing counter but not action taken… it continues to be same.

Dmart has increased the same store growth by extending the time. On saturday/Sunday they open early.


(Abhishek Jain) #1040

While a lot of debate has happened and will consistently happen over the extremely high valuations of D-Mart; nobody can really make out what should be the right P/E multiples- if it is 50 then why so? In my opinion PE as a parameter is the most distorted way of valuing a stock; of course, profit margin reduced by 2% and that’s a reason for concern; but DMart encountered the same in the past as well and rebounded back handsomely.
Now coming to “on the ground” and " Buy what you see" approach of Peter Lynch: almost everybody concurs without any doubt that if there is a D-mart, there are no chances of any competitor suviving in the nearby vicinity of 1 to 2 kms.I have experienced the same personally in Thane,Mumbai area- Reliance and More had to close their outlets which were nearby(there may be some other factors though, but I have never seen a D-Mart closing at any place); such is the moat and value provided by the company.
In the earlier posts, someone compared with Reliance retail: we need to visit Reliance megastores to realize the difference in quality, variety,billing counters experience,rates etc vs our company.
Comparing D-Mart vs Reliance is like “doing one thing thousand times” vs doing “thousand things one time” :slight_smile:
The management has passion, vision, experience and funds to identity and overcome the challenges forward. Some of the initiatives like lease model(for new stores), faster increasing online presence(beyond Mumbai suburbs) are low hanging fruits which the management would for sure be looking at.

Disclosure: I have Dmart as 10% in my portfolio and thus views may be biased.